Important – this applies to all legal firms handling client money – not just those firms involved in the provision of Legal Aid services

Proposals have been made to fund legal aid by skimming interest from all client money accounts, thereby leading to a potential reduction in profits for all legal firms handling client money. These have been issued under the heading of ‘Legal Aid Reform’ and may therefore have gone un-noticed by firms not involved in this type of work. 

The proposals, made by the Ministry of Justice,  are set out in very brief outline as follows:

Proposal 1:
A solicitor holds or receives client money and must keep this within a client account. Interest over and above that which is paid to clients is to be remitted to the Government account annually to support the legal aid fund.

Proposal 2:
Solicitors would be asked or required to pay all client money into a central Government bank account instead of their own general client account. The client will receive a sum in lieu of interest and any excess interest (earned by reason of holding higher pooled balances) would be retained by the Government.

Our initial thoughts

Legal aid has to be funded either by the tax payer or by the legal profession. If it is to be funded by the legal profession as is being proposed by the MoJ, it does not seem either fair or straightforward to approach this in either of the ways being suggested.

We have yet to finalise our response to the proposals, but read our initial views here:

• Firms will be foregoing an element of their profits by giving up interest to a central fund.  Whilst interest rates are very low, this may have little impact, but this will not be the case if interest rates rise in the future.
• This approach would seem to be at odds with the Government’s wish to encourage solicitors to remain competitive, as any loss of profitability may need to be offset by a corresponding increase in fee levels.  This does not benefit the users of legal services.
• There are practicalities of operating either system.  The cost of implementing and managing these arrangements to avoid errors occurring e.g. in the treatment of mixed monies, particularly in smaller firms is likely to outweigh any potential benefits.
• The proposals have been based on the existing SAR rules regarding calculation of interest.  However, these rules have been revised so are no longer relevant as a basis to calculate interest due to a central fund.
• Holding money in a central fund is against the principle of the solicitor being responsible for safeguarding client money.
• The amount of revenue raised by implementing either of the proposed systems will fluctuate depending on interest rates.  This will not lead to a consistent level of funding for the legal aid system.
• These proposals will apply to all firms handling client money, regardless of size.  This means that firms who do not handle client money will not contribute.  This seems unfair. 

We believe that a more logical approach would be to include a levy as part of the practicing certificate fee. This would mean that the cost of providing legal aid services is spread equally amongst all solicitors in practice and thus would be fairer to all. It would raise a consistent level of income year by year, thereby enabling the Government to fund a consistent level of legal aid services. It would also remove all additional administration burden for firms.

The full details of the proposals can be found by following this link: http://www.justice.gov.uk/consultations/docs/legal-aid-reform-consultation.pdf. Chapter 9 is the relevant section of this document.